Business Growth - Costa Looks East

Here is a really interesting example of external growth through horizontal integration with a highly successful UK drink and leisure business seeing expansion opportunities in Central and Eastern Europe. Costa is paying £36million for Coffee Heaven a business that has 90 coffee shops in Central and Eastern Europe, comprising 62 shops in Poland, 14 in the Czech Republic and 14 across Bulgaria, Hungary and Latvia.

Costa has more than 1,000 stores in the UK and more than 400 internationally and its stores account for around 25 per cent of Whitbread’s total revenues. All its international stores are operated under franchise. Costa is a wholly-owned unit of Whitbread, the U.K.‘s largest hotel and restaurant company operating brands in the budget hotel, restaurant and coffee shop sectors, whose brands include Premier Inn, Beefeater and Brewers Fayre. Premier Inn is the key part of this business - its fortunes essentially drive the company’s share price.

2010-11 should see a number of CEEC countries emerge from a turbulent and difficult macroeconomic period. And as per capita incomes rise, the potential for growth of market demand in high street coffee stores in many of the EU’s new member states ought to be high. That said Coffeeheaven has made net losses in each of the last seven years - Costa will be hoping that its greater financial resources and economies of scale will help to bring the business back into profitability. Whitbread has an annual capital spending in excess of £300million, so the £36million paid for Coffee Heaven looks small in comparison.